Do not financial institution on that refund but. April tax season might come as an enormous shock
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If you are counting on a tax refund, you could be sorely disappointed this filing season.
A new W-4 form and a pandemic-dominated 2020 may have millions of Americans receiving smaller refunds, or even owing money to the government, this year.
“I’ve already seen people upset that they owe money or that they’re not getting as much back this year as they expected,” said Adam Markowitz, enrolled agent with Howard L Markowitz PA CPA in Leesburg, Florida.
He expects to shoulder much of the blame from disappointed clients.
“I’m dreading this tax season,” he said.
Two major factors could spoil the springtime refund euphoria. The first is the new W-4 form introduced under the Tax Cuts and Jobs Act that governs withholding from employee paychecks. After a one-year implementation delay in 2019, the major changes in the new form took full effect last year and it could be a shock for many taxpayers.
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“I hate this new form mostly because it’s not the old form,” said Nayo Carter-Gray, founder of bookkeeping and tax prep firm 1st Step Accounting in Towson, Maryland. “It has confused a lot of people.”
The new W-4 form was intended to minimize refunds and have withholdings more accurately reflect people’s ultimate tax liabilities. In other words, many taxpayers took home slightly bigger paychecks last year at the expense of refunds this spring.
That’s a laudable goal, theoretically, as refunds are essentially interest-free loans to the government. However, Markowitz believes that many people will fail to appreciate the bigger take-home pay and then really miss the refund in April.
“The withholding tax is the equivalent of a savings vehicle for many people — particularly lower-income taxpayers,” he said. “We’ll be doing a lot of triage explaining why people are in this situation.”
Unemployment checks aren’t tax-free
The second big item that could surprise people is unemployment benefits they may have received. While the coronavirus stimulus payments were tax-free, the enhanced unemployment benefits were not.
“Employees who were laid off or furloughed for a period and drew unemployment benefits face the biggest issues,” said Carter-Gray.
Numbers from the Labor Department showed 13.4 million people were receiving unemployment benefits last September, and the numbers remained high throughout the year. The withholding of tax from unemployment benefits is voluntary at the state and federal levels and many states by default withhold very little tax or none at all.
“People who never collected unemployment benefits before were doing it last year and, in a lot of cases, there was no withholding or not enough from the payments,” Markowitz said.
That means many taxpayers are liable for taxes on those benefits now. It could eat up most of the refund they might have otherwise expected and, combined with lower withholdings per the new W-4 form, more people may have to send checks to Uncle Sam in April. Markowitz expects to be helping his lower-income clients figure out ways to do that.
“I’m sitting down with my smallest clients because this will be a problem and a shock for a lot of them,” he said. “It’s going to be a real struggle for taxpayers and tax preparers this year.”